Asia's electoral implications
26 August 2019
One of the striking aspects
of these recent elections has
been that the status quo has
been maintained in many of
the more significant votes.
The latest electoral cycle has come
to a close in Asia. Despite the general
trend globally for political change
observed in the last few years, one of
the striking aspects of these recent
elections has been that the status quo
has been maintained in many of the more
Asia portfolio manager Tom Wills looks
at the impact of elections in two of the
largest economies in the region – India
India - Modi strengthens his power base
Narendra Modi’s BJP has increased its majority following
seven phases of voting throughout April and May. It is
the first time since 1971 that an incumbent prime
minister’s party has secured an absolute majority for a
second successive term.
With an effective coalition of approximately 350 out of
the 542 seats in the Lok Sabha (lower house), Modi, in
theory, has both the mandate and the ability to
implement his manifesto promises. However, in a country
of nearly 1.4 billion people – and with some significant
macroeconomic and social challenges, this task may not
be as easy as it first appears.
Modi’s election campaign focused on India working
together to achieve inclusive growth with campaign
pledges included doubling farmers incomes by 2022,
making India the third-largest global economy by 2030
and spending more than US$1.4 trillion on new
However, a key plank of Modi’s campaigning has also
been around maintaining the lower levels of inflation he
has delivered since taking office in 2014 (see chart
below). In this context – and given the challenges around
twin deficits (current account and fiscal) – the
expectation was that Modi would be more likely to
promote a consumption-driven recovery than one relying
on significant incremental infrastructure spending. In
reality, the July 2019 budget was more skewed towards
infrastructure. However, this was based on what look like
optimistic assumptions for increased goods and services
tax (GST) collections.
Consumer price index (India)
Source: FactSet, as at May 2019
In that context, unless the June Reserve Bank of India
(RBI) policy rate cut succeeds, a fiscal drive to boost
consumption remains likely at some stage – particularly
given the recent lacklustre GDP growth figures. The first
quarter of 2019 saw the lowest quarterly growth since the
first quarter of 2014, before Modi was first elected, and
came partly due to a wider slowdown in consumption that
has been particularly acute in the auto sector.
Indian real GDP growth
Source: FactSet, as at March 2019.
With an effective coalition of
approximately 350 out of the
542 seats in the Lok Sabha
(lower house), Modi, in theory,
has both the mandate and the
ability to implement his manifesto
Extra support for India’s rural population
In the pre-election period, there was plenty of rhetoric
around increasing support for rural India. Indeed, a support
scheme for smallholding farmers was introduced in the
February 2019 budget, with all farmers owning less than
two hectares given a direct 6,000 rupee (approx. US$87)
transfer annually (in three tranches). The first phase of this
scheme was implemented very quickly – meaning the
intended recipients should have already received some
form of payment prior to the start of the election. The fact
this payment is both staggered and recurring (so not just a
one-off electoral ‘bribe’) implies the impact should be more
sustainable. However, despite the early implementation,
only around half of the approximately 130 million eligible
farmers have actually been identified and received
payment as of mid-August 2019. Consequently, there
remains a potentially significant incremental boost to rural
consumption as the remainder of the scheme is
In addition to this, promises were made during
campaigning around farm loan waivers and minimum
income programmes (on top of the farm support scheme) –
although no further progress appears to have been made
on either issue.
Housing for all
India’s policymakers have grappled with India’s affordable
housing shortage for some time, with the estimated gap at
around 19 million – and millions more Indians projected to
move to the country’s urban centres in the next 20 years
The government launched its ‘Housing For All’ programme
in 2015, and increasing availability of affordable housing will
be another area of focus in this new administration.
However, with the BJP having promised that every Indian
will have a home by 2022, significant additional action will
This is an area where policy can help to drive growth
(rather than just cash transfers); for example, by enacting
legislation to permit banks to fund land acquisition or
offering tax incentives for rental income.
Given the labour-intensive nature of housebuilding, action
here would also help to improve employment rates.
According to the Periodic Labour Force Survey by the
National Sample Survey office, unemployment has risen to
6.1% in 2018 (of which 5.3% rural & 7.8% urban respectively),
a higher level than has been seen in recent years.
What does this mean for investors?
As equity investors, there are a number of ways in which
we can potentially benefit from policies outlined above. In
rural areas, fast moving consumer goods companies such
as Hindustan Unilever and ITC Limited both have an
outstanding distribution reach that can capture
consumption growth from rural consumers finding
themselves with higher disposable incomes. On the
property side, apart from direct beneficiaries such as the
property developers, those financing the housing such as
HDFC Bank, which has the strongest retail franchise in the
Indian banking market, are well positioned to benefit from
increased mortgage demand if more houses are built, while
the likes of Asian Paints will see increased demand for
Indonesia – Jokowi pursues his reform agenda
Joko Widodo (‘Jokowi’) was re-elected as President in
April. Having won 55.5% of the vote, he now has a
stronger mandate in his second term to drive his reform
agenda. During his first term in office, he was forced to
compromise with rival political parties in return for them
backing his administration. He now has greater support
from the House of Representatives, with the parties in
support of him projected to control more than 60% of
the seats in the legislature – although exact numbers are
likely to fluctuate until final cabinet positions are agreed
around October 2019.
The president’s focus is on healthcare and building the
foundations of sustainable long-term economic growth.
There are four areas of focus for the new Jokowi
administration which are all interlinked – infrastructure,
structural reforms, development of human capital and
technology & innovation.
There will be a renewed infrastructure drive in Jokowi’s
second term, with a proposed US$400 billion
programme currently being drafted. A number of
changes were made in his first administration – such as
the simplification of the land acquisition process.
Although enacted prior to Jokowi’s ascension to power,
the prompt implementation of the legislation has
significantly reduced one of the key barriers to efficient
infrastructure development. Incremental infrastructure
spending is likely to focus on major investment in the
transportation and power network, as well as a renewed
push to cut the country’s housing gap.
Under Jokowi’s plans there is a push for the private
sector to play a larger role in the country’s infrastructure
build out. The proposal is for State-Owned Enterprises
to execute low-return projects, with the private sector
being allocated the higher-return brownfield projects.
However, for this to happen changes to securitisation
regulations are required.
Forecasts by the Indonesian government imply the
country will be the world’s fourth-largest economy by
2045. However, according to a report by the Asian
Development Bank, real GDP needs to grow faster than
the prevailing 5–5.5% range for it to develop into a high-income country in that timeline. To achieve this on a
sustainable basis, Indonesia must raise export incomes
and savings by boosting productivity, thus providing
further headroom for investment, and increasing longer-term capital inflows.
Indonesian real GDP growth
Source: FactSet, as at June 2019.
Central to this will be lowering the current account
deficit, which has worsened again in recent quarters,
weighing on the rupiah and consequently the ability of
Indonesia to attract investment. This will involve
continuing to develop the infrastructure network in
order to ease the transport of goods and services
between its islands, as well as boosting its exports. But
Jokowi has also signalled his intention to scrap
redundant government agencies and red tape which
Indonesian current account as % of GDP
Source: FactSet, as at June 2019.
Reform of the manufacturing sector is also much needed.
This will involve the opening of more sectors to foreign
investment and changes to its stringent labour laws. The
aim is to increase the contribution from the
manufacturing sector, with an emphasis on electronics,
chemicals and automotive.
Implementing meaningful reform will be a challenge, but
Jokowi’s stronger electoral mandate should embolden
the government in this aim. Under Indonesia's
constitution, presidents and vice presidents are limited
to two five-year terms so Jokowi will be determined to
build the foundations for long-lasting economic reform
while he is still at the helm.
Improving human capital
Indonesia has a very large and growing young
population. Harnessing this powerful demographic will
certainly be a focus of the next five years. Reflecting this,
there is already a pledge to introduce some ‘younger
blood’ into the cabinet.
While Jokowi’s first term was about bridging the infrastructure gap. His second could be dominated by an attempt to improve the country’s skills base as the
government aims to ensure the country has the high-quality technology platform for the future.
Also, Jokowi’s first term included many consumer-centric
policies targeted at the younger cohort and this is likely
to continue in his next five years. One of his campaign
promises was to extend social assistance benefits for
areas like healthcare and education. This includes
expanding the scope of the Indonesia Smart Card
programme (KIP), which currently provides free
education up to high school, to include university. A
better-educated population should lead to the creation
of better jobs, which itself should drive an improved
consumer spending environment.
Indonesia looks set to be one
of the next countries to benefit
from the explosion in digital
Technology and innovation
Indonesia looks set to be one of the next countries to
benefit from the explosion in digital technology.
We have seen increasing evidence that online retail is
near an inflection point, similar to where China was in
the earlier part of the decade. Its share of the retail
market is currently still in the low single digits,
compared with China where online accounts for over
20% of retail spend.*
Several online companies in Indonesia have attracted
financial backing from overseas internet giants with
very deep pockets – for example, online retailers
Lazada (China’s Alibaba), Tokopedia (Alibaba, Japan’s
Softbank and US venture capitalist Sequoia Capital)
and Shopee (Chinese firms Tencent and JD.com).
The digital innovation does not stop at e-commerce.
Indonesia’s first ‘decacorn’ (a privately held company
valued at over US$10 billion), ride sharing app Go-Jek,
has received investment from Chinese internet
companies Tencent and JD.com alongside local
consumer-focused company PT Astra International,
which is part of the pan-Asian conglomerate Jardine
What does this mean for companies?
A range of companies should benefit from the reform
agenda. Well-run banks such as Bank Rakyat, Bank
Mandiri and Bank Central Asia will be required to
provide funding for the infrastructure programme, and
property developers are poised to benefit from the
government’s push to address the housing deficit in
Indonesia. Cement producers, particularly the two
industry leaders Semen Indonesia and Indocement,
should enjoy an upsurge in demand while leading toll
road developer/operator Jasa Marga will benefit both
from new road sections directly, but also through
improved returns in their existing assets thanks to the
network effect of a more comprehensive road system.
The online retail industry is set to grow extremely
rapidly, and although these businesses are still burning
very large amounts of cash, we will watch with interest
as to who will emerge as the long-term winners in this
space. Online growth notwithstanding, growing
consumer wealth should also benefit more established
offline retailers – both for the lower-income group, with
stores such as Ramayana, and also the increasingly
wealthy segment who appreciate the international
brands offered by companies such as Mitra Adiperkasa.
*Source: Statista and eMarketer.
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Investment Management Limited (‘MCIM’). It does not
constitute investment advice.
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